This invention relates to leveraged index products and, in particular, leveraged mutual funds and leveraged exchange traded funds (ETF's).
Traditional index funds allow an investor to invest in a single instrument that generally replicates the performance of a benchmark index. Leveraged index products, on the other hand, seek to return a multiple of the return of an underlying benchmark over a period of time that generally coincides with the frequency of the product's determination of its net asset value.
Generally, leveraged index funds seek to return a multiple of the daily return of an underlying index because these funds are required to calculate a daily net asset value. Each calculation of net asset value yields a new level of net assets and, therefore, a new base upon which the multiple of the return is based.
The extent to which a leveraged index product provides a multiple of the return of the benchmark index is generally referred to as the “Beta” of the product. For example, the Direxion S&P 500® Bull 2.5× Fund aims to provide a return that is 2.5 times (e.g., 250%) the daily return of the S&P 500 Index® and thus is a Fund with a beta of 2.5.
Leveraged index products attempt to achieve the stated return by providing exposure to the benchmark in an amount equal to the product of the beta of the fund and the fund's net assets each day. For instance, if an investor makes a $100,000 investment in the Direxion S&P 500® Bull 2.5×, at the net asset value on a given day, the investor will receive the equivalent of $250,000 of exposure to the S&P 500 Index® for the following day. If the value of the S&P 500 Index® rises by 1% the next day, the 1% gain on the $250,000 of exposure would translate into a gain of 2.5% on the investor's $100,000 investment. Conversely, if the S&P 500 Index® declines 1%, the 1% loss on the $250,000 of exposure would translate into a 2.5% loss on the investor's $100,000 investment.